Some Basic Thoughts on a Complicated Subject:
Taxes & Exchanges
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Real estate ownership offers many advantages. The usual benefits like shelter, comfort, enjoyment and financial opportunities are obvious. The benefits accessible as a result of Federal Tax regulations are also many and complex. Therefore, for detailed and updated tax information, contact an accountant, tax attorney or the Internal Revenue Service or a professional tax preparer. As REALTORS®, we can suggest options and sources for answers. However, because tax laws are constantly revised and reinterpreted, we cannot guarantee the accuracy of this information. Since we are generally not trained or licensed to provide tax information, we can just mention a few options for your consideration.
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Deductions For Personal Residences:
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- Interest paid on mortgages for both first and second homes
- Real estate taxes on personal residences
- Tax withheld from your monthly salary may be adjusted to increase your take-home pay.
- Office use - Part or full time use of space in your home as an office may be tax deductible.
- Moving expenses - Some may be deductible if you are moving more than 50 miles from your present location.
- Capital gains exclusions: A homeowner may be able to exclude up to $250,000 of the gain from the sale of a principal residence ($500,000 for a married couple filing jointly).
- Reinvest in real estate: Capital gains tax will not be due on the sale of a residence of a homeowner if another residence is purchased of equal or greater value of the adjusted sale price of the first home.
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Depreciation: Real estate investors who actively participate in management of their rental properties may deduct depreciation and losses within certain limits.
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Exchanges: Exchange of one home for another may be tax free as long as the new home equals or exceeds the adjusted sale price of the former residence.
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Starker Exchanges (IRS Code 1031) (A way to defer capital gains on investment property)
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When you profit from the sale of an investment property, the Internal Revenue Service wants to be paid. For an investor who has held a property for a longer time, there may be major value gains over the depreciation cost that can result in major profit loss through taxes due. The legal way to protect/defer some of that equity is under IRS Code 1031. It works by legally allowing a seller to move/roll into a new acquisition of "like kind" property to defer the immediate capital gain taxes.
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Some general rules for a 1031 Exchange/Trade:
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- The investor must exchange property of a "like kind" (the definition of which is quite liberal).
- The reinvestment must be for property of equal or higher replacement value. Capital gains tax is due if the replacement cost of the property is less.
- The exchange does not have to be a swap between two investors.
- The investor cannot have any contact with his sale proceeds when selling one investment and buying another, nor can he use his normal professional advisors or agents if they have worked for him within the last two years.
- The proceeds are held and controlled by an intermediary who will handle the reinvestment in the property to be purchased.
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The rules for a 1031 Exchange/Trade are outlined in three basic steps.
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- The exchanger finds a cash buyer for the smaller "like kind" property. When the sale closes, the cash must be held by a third-party qualified intermediary . (If the seller has access to that cash, called constructive receipt, the sale proceeds are taxable to the seller.)
- Within 45 days of closing the sale, the exchanger must designate the property to be acquired, with the sales proceeds being held by the intermediary (plus any cash to be added).
- The purchase of the designated property must be completed within 180 days after selling the old property.
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A 1031 delayed exchange agreement should be prepared by a tax or real estate attorney.
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More on Tax-Free Exchanges:
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When "like-kind" exchange of investment properties or business properties are made, losses are not deductible. If the properties are sold in a later year, they may be taxable at that time.
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Vacation Homes and primary residences may be exchanged like investment properties with no capital gains tax due as long as the properties are of equal or greater value.
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Statistics reveal that the savings and equity available to most retirees are derived from their real estate investments. When wisely done (considering things like location, ease of maintenance, area trends and long-term appreciation potential), they provide wealth from their appreciated value plus deductions such as interest, maintenance, taxes, depreciation and more. The resources available to provide the necessary information to optimize your real estate investment return are enormous. As REALTORS® (not accountants, tax experts or attorneys), our job is to locate opportunities that may work for you.
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Raben Real Estate
302 Main Street
Rapid City, SD 57701
1-605-342-7272  Toll Free: 1-888-341-7272
Fax: 1-605-343-8900 |
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